When it comes to financing the growth of your business, you may find yourself choosing between the lesser of two evils. Selling shares in your business can provide an immediate cash injection, but it means giving up some of your valuable equity stakes. Alternatively, borrowing money from a bank can be costly to repay, limit growth, and often requires a personal guarantee.
However, there is a third option: customer financing. This approach involves convincing your customers to prepay for some or all of your products or services. Customer financing can provide you with the necessary working capital to drive growth.
Maximum Possibilities works with you to understand innovative ways to generate capital without compromising equity or creating unnecessary debt.
How Brad Lorge Got His Customers to Fund the Growth of His Business
In 2015, Brad Lorge founded Premonition. Premonition is a technology company that provides logistics software to streamline delivery operations for large enterprise companies. While working with big businesses generated good revenue, customers were slow to make purchasing decisions. Moreover, securing customer follow-through was a cumbersome process when they decided to buy. Premonition risked losing months’ worth of work for nothing if an implementation failed.
Rather than the traditional approach of financing a software start-up (rounds of dilutive funding), Lorge asked his customers to prepay. Having customers pay in advance allowed Premonition to utilize the cash from its customers to fund its growth.
By March 2022, Premonition had grown to $3 million in Annual Contract Value (ACV) when Shippit acquired it for $20.5 million—an implied valuation of just under seven times ACV. Better yet, because they used customer financing, Lorge and his partners still owned 80% of the equity in the company when they sold it.
Customer financing can be a powerful tool for business owners looking to raise money without sacrificing business equity. If you’re considering using Lorge’s prepay model, understand your customer’s needs and motivations. Consider what might motivate your customer to prepay. Can you guarantee delivery times in return for a project deposit? Can you offer incentives or discounts that make sense for your business and your customers?
Productize Your Service
If you offer a service, another strategy for getting customer prepayments is to consider productizing it. A productized service is a predefined service delivered repeatedly to multiple clients similarly, with a fixed set of deliverables, processes, and pricing. Examples of productized services include website design packages, social media management plans, and content creation bundles.
Productizing a service aims to simplify the sales process, increase efficiency, and provide a predictable customer experience. By creating a standardized offering, service providers reduce the time and effort required to close a sale. Additionally, providers minimize the need for customization, which can be time-consuming and expensive.
Best of all, when it comes to products, most people are conditioned to advance payment (e.g., you expect to pay for that box of cereal at the grocery store before going home to dig in).
Therefore, if you package your service offering into a product, your customers will be more inclined to pay upfront.
Reach Your Maximum Potential with Maximum Possibilities
As an entrepreneur, you have dedicated significant effort to establish and grow your business. It is worth the effort to preserve your equity and avoid unnecessary debt.
Asking customers to prepay and productizing your services can be effective ways to drive capital growth.
Let Maximum Possibilities help you reach your business goals and reach maximum profitability. Regardless of when you are planning to sell, establishing the best business practices will pay long-term dividends.
The first step is completing a Value Builder Scorecard for your company. This short survey helps us to define your company’s strengths and weaknesses, which, when resolved, will increase its value.
Schedule a discovery call with us today to learn more about how we can assist you in achieving your business goals.